Objectives and Principles

of
Securities Regulation

International Organization of Securities Commissions

September 1998
 Foreword and Executive Summary

This document sets out 30 principles of securities1 regulation, which are based upon three
objectives of securities regulation. These are:

The protection of investors;2

Ensuring that markets are fair, efficient and transparent;

The reduction of systemic risk.

The 30 principles need to be practically implemented under the relevant legal framework
to achieve the objectives of regulation described above. The principles are grouped into
eight categories.

A. Principles Relating to the Regulator

1 The responsibilities of the regulator should be clear and objectively stated.

2 The regulator should be operationally independent and accountable in the

exercise of its functions and powers

3 The regulator should have adequate powers, proper resources and the capacity
to perform its functions and exercise its powers.

4 The regulator should adopt clear and consistent regulatory processes.

5 The staff of the regulator should observe the highest professional standards
including appropriate standards of confidentiality.

1
For convenience, in this document, the words securities markets are used, where the context permits,
to refer compendiously to the various market sectors. In particular, where the context permits they
should be understood to include reference to the derivatives markets. The same applies to the use of
the words securities regulation. (See IOSCO By-Laws, Explanatory Memorandum).
2
The term investor is intended to include customers or other consumers of financial services.

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B. Principles for Self-Regulation

6 The regulatory regime should make appropriate use of Self-Regulatory

Organizations (SROs) that exercise some direct oversight responsibility for
their respective areas of competence, to the extent appropriate to the size and
complexity of the markets.

7 SROs should be subject to the oversight of the regulator and should observe
standards of fairness and confidentiality when exercising powers and
delegated responsibilities.

C. Principles for the Enforcement of Securities Regulation

8 The regulator should have comprehensive inspection, investigation and

surveillance powers.

9 The regulator should have comprehensive enforcement powers.

10 The regulatory system should ensure an effective and credible use of

inspection, investigation, surveillance and enforcement powers and
implementation of an effective compliance program.

D. Principles for Cooperation in Regulation

11 The regulator should have authority to share both public and non-public
information with domestic and foreign counterparts.

12 Regulators should establish information sharing mechanisms that set out

when and how they will share both public and non-public information with
their domestic and foreign counterparts.

13 The regulatory system should allow for assistance to be provided to foreign

regulators who need to make inquiries in the discharge of their functions and
exercise of their powers.

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E. Principles for Issuers

14 There should be full, timely and accurate disclosure of financial results and
other information that is material to investors decisions.

15 Holders of securities in a company should be treated in a fair and equitable

manner.

16 Accounting and auditing standards should be of a high and internationally

acceptable quality.

F. Principles for Collective Investment Schemes

17 The regulatory system should set standards for the eligibility and the
regulation of those who wish to market or operate a collective investment
scheme.

18 The regulatory system should provide for rules governing the legal form and
structure of collective investment schemes and the segregation and protection
of client assets.

19 Regulation should require disclosure, as set forth under the principles for
issuers, which is necessary to evaluate the suitability of a collective
investment scheme for a particular investor and the value of the investors
interest in the scheme.

20 Regulation should ensure that there is a proper and disclosed basis for asset
valuation and the pricing and the redemption of units in a collective
investment scheme.

G. Principles for Market Intermediaries

21 Regulation should provide for minimum entry standards for market

intermediaries.

22 There should be initial and ongoing capital and other prudential requirements
for market intermediaries that reflect the risks that the intermediaries
undertake.

23 Market intermediaries should be required to comply with standards for

internal organization and operational conduct that aim to protect the interests
of clients, ensure proper management of risk, and under which management of
the intermediary accepts primary responsibility for these matters.

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 24 There should be procedures for dealing with the failure of a market
intermediary in order to minimize damage and loss to investors and to contain
systemic risk.

H. Principles for the Secondary Market

25 The establishment of trading systems including securities exchanges should be

subject to regulatory authorization and oversight.

26 There should be ongoing regulatory supervision of exchanges and trading

systems which should aim to ensure that the integrity of trading is maintained
through fair and equitable rules that strike an appropriate balance between the
demands of different market participants.

27 Regulation should promote transparency of trading.

28 Regulation should be designed to detect and deter manipulation and other

unfair trading practices.

29 Regulation should aim to ensure the proper management of large exposures,

default risk and market disruption.

30 Systems for clearing and settlement of securities transactions should be

subject to regulatory oversight, and designed to ensure that they are fair,
effective and efficient and that they reduce systemic risk.

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 Table of Contents

Page

Part I - Introduction and Statement of Objectives and Principles

1. Introduction 1

2. Implementation 4

3. Structure of the Document 5

4. Objectives of Securities Regulation 6

4.1 Objectives of Securities Regulation 6

4.2 Discussion of the Objectives 6
4.2.1 The Protection of Investors 6
4.2.2 Ensuring that Markets are Fair, Efficient,
and Transparent 7
4.2.3 The Reduction of Systemic Risk 8

5. The Regulatory Environment 9

Part II - The Regulator

6. The Regulator 10

6.1 Principles Relating to the Regulator 10

6.2 Clear Responsibility 10
6.3 Independence and Accountability 11
6.4 Adequate Powers and Proper Resources 11
6.5 Clear and Consistent Regulatory Processes 12
6.6 The Conduct of Staff 12

7. Self-Regulation 13

7.1 Principles for Self-Regulation 13

7.2 The Role of SROs 13
7.3 Authorization and Oversight 13

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8. Enforcement of Securities Regulation 15

8.1 Principles for the Enforcement of Securities Regulation 15

8.2 Inspection and Compliance Programs 15
8.3 Comprehensive Enforcement Powers 16
8.4 International Enforcement 17
8.5 Money Laundering 17

9. Cooperation in Regulation 18

9.1 Principles for Cooperation in Regulation 18

9.2 The Need for Domestic Cooperation 18
9.3 The Need for International Cooperation 18
9.4 The Scope of Cooperation 20
9.5 Cooperation on Financial Conglomerates 21

Part III - Issuers, Market Intermediaries, and Secondary Markets

10. Issuers 23

10.1 Principles for Issuers 23

10.2 The Scope of this Section and the Need to Regulate Issuers 23
10.3 Timely Disclosure of Information 24
10.4 When Disclosure is Required 24
10.5 Information About Corporate Control 25
10.6 Accounting and Auditing Standards 26

11. Collective Investment Schemes 28

11.1 Principles for Collective Investment Schemes 28

11.2 Scope of this Section 28
11.3 Eligibility to Act as an Operator 29
11.4 Supervision of Conduct, Conflicts of Interest and Delegation 29
11.5 Legal Form and Structure 30
11.6 Disclosure to be Made to Investors 30
11.7 Client Asset Protection 31
11.8 Asset Valuation and Pricing 31
11.9 Redemption of Interest in a Scheme 31
11.10 International Regulatory Cooperation 32

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12. Market Intermediaries 33

12.1 Principles for Market Intermediaries 33

12.2 Scope of this Section 33
12.3 Licensing and Supervision 34
12.4 Capital Adequacy 35
12.5 The Conduct of Business Rules and Other Prudential
Requirements 36
12.6 Action in the Event of Financial Failure of an Intermediary 38
12.7 Supervision of Intermediaries 39
12.8 Investment Advisers 40

13. The Secondary Market 42

13.1 Principles for the Secondary Market 42

13.2 Scope of this Section 42
13.3 Securities Exchanges and Trading Systems 43
13.4 Ongoing Supervision of Markets and Information About
Market Processes 44
13.5 Transparency of Trading 45
13.6 Prohibition of Manipulation and Other Unfair Trading
Practices 45
13.7 Large Exposures, Default Procedures and Market Disruptions 46
13.8 Clearing and Settlement 47
13.9 Regulation and Standards for Clearing and Settlement
Systems 47
13.10 Verification of Trades in Clearing and Settlement Systems 47
13.11 Risk Issues in Clearing and Settlement Systems: Margining,
Netting, and Short Selling and Securities Lending 47
13.11.1 Margining 48
13.11.2 Netting 49
13.11.3 Short Selling and Securities Lending 49

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 Part I

Introduction and Statement of Objectives and

Principles

1. Introduction
This document sets out three objectives upon which securities regulation is based.
Although there are local differences in market structures, these objectives form a basis for
an effective system of securities regulation.

The document also sets out thirty principles of securities regulation that give practical
effect to the objectives. The discussion provides some examples of current practices,
recognizing that these practices will and should change as the markets change and as
technology and improved coordination among regulators makes other strategies available.

The securities and derivatives markets are vital to the growth, development and strength
of market economies. They support corporate initiatives, finance the exploitation of new
ideas and facilitate the management of financial risk. Further, since retail investors are
placing an increasing proportion of their money in mutual funds and other collective
investments, securities markets have become central to individual wealth and retirement
planning.

Sound and effective regulation and, in turn, the confidence it brings is important for the
integrity, growth and development of securities markets.

IOSCO is the leading international grouping of securities market regulators. Its current
membership comprises regulatory bodies from 91 countries who have day to day
responsibility for securities regulation and the administration of securities laws.

The Preamble to IOSCOs By-Laws states:

Securities authorities resolve to cooperate together to ensure a better

regulation of the markets, on the domestic as well as on the
international level, in order to maintain just, efficient and sound
markets:

to exchange information on their respective experiences in order

to promote the development of domestic markets;

to unite their efforts to establish standards and an effective
surveillance of international securities transactions;

1

to provide mutual assistance to ensure the integrity of the markets
by a vigorous application of the standards and by effective
enforcement against offences.

IOSCO recognizes that sound domestic markets are necessary to the strength of a
developed domestic economy and that domestic securities markets are increasingly being
integrated into a global market.

The IOSCO By-Laws also express the intent that securities regulators, at both the
domestic and international levels, should be guided by a constant concern for investor
protection.

The international regulatory community should provide advice, and a yardstick against
which progress towards effective regulation can be measured. This document further
evidences IOSCOs commitment to the establishment and maintenance of consistently
high regulatory standards for the securities industry. As the leading international
grouping of securities regulators, IOSCO accepts responsibility for helping to establish
the high standards for regulation.

Consistently high regulatory standards and effective international cooperation will not
only protect investors but also reduce systemic risk.

Regulators should be prepared to address the significant challenges posed by the

increasing importance of technology and particularly developments in the area of
electronic commerce.

Increasingly globalized and integrated financial markets pose significant challenges to the
regulation of securities markets. At the same time, markets, particularly some emerging
markets which have seen much growth in recent years, have been prone to effects of
cross-border and cross-asset interactions, and some also are susceptible to higher short
term volatilities after economic shocks or during periods of great uncertainty. Therefore,
in a global and integrated environment regulators must be in a position to assess the
nature of cross-border conduct if they are to ensure the existence of fair, efficient and
transparent markets.

An increasingly global market place also brings with it the increasing interdependence of
regulators. There must be strong links between regulators and a capacity to give effect to
those links. Regulators must also have confidence in one another. Development of these
linkages and this confidence will be assisted by the development of a common set of
guiding principles and shared regulatory objectives.

2
Many of the topics addressed in this document are already the subject of IOSCO reports
or Resolutions.3 The reports published by IOSCO and the Resolutions adopted by its
membership are also a valuable source of information on the principles that underly
effective securities regulation and the tools and techniques necessary to give effect to
those principles. This document draws upon those reports as a primary source.
IOSCOs reports generally provide a more detailed treatment of the particular topic.
Reference is made to those reports and resolutions in the notes to this document and
they should be consulted when considering particular topics. Full copies of the text of
reports and resolutions can be obtained from the IOSCO Secretariat.4

3
A full list of IOSCO Resolutions appears as Annexure 1. A full list of IOSCO Reports appears as
Annexure 2.
4
The address for the IOSCO Secretariats Internet homepage is http://www.iosco.org/.

3
2. Implementation

IOSCO members through their endorsement of this document express their commitment
to the objectives and principles it sets out. Insofar as it is within their authority, they
intend to use their best endeavours within their jurisdiction to ensure adherence to those
principles. To the extent that current legislation, policy or regulatory arrangements may
impede adherence to these principles, they intend that changes should be sought.

There is often no single correct approach to a regulatory issue. Legislation and regulatory
structures vary between jurisdictions and reflect local market conditions and historical
development. The particular manner in which a jurisdiction implements the objectives
and principles described in this document must have regard to the entire domestic
context, including the relevant legal and commercial framework.

Depending upon the matter in question and the arrangements within a particular
jurisdiction, implementation may require any or all of: a change in legislation or
regulation; a change in policy or practice by the regulatory authority; or a bilateral or
multilateral agreement.

The regulator should frequently review the particular way in which securities regulation is
carried out in its market. This document is not exhaustive in its treatment of all areas of
market activity, the markets themselves are in a constant state of development and the
content of regulation must also change if it is to facilitate and properly regulate those
changing markets. The means to give effect to the principles described in this document
should, therefore, be expected to change over time.

4
3. Structure of the Document

The paper is divided into three parts.

Part I provides an introduction to the paper and a statement of the objectives and the
principles of securities regulation. There is a brief discussion of each of the objectives.

Part II describes the desirable attributes of a regulator and the potential role of
self-regulatory organizations. It also considers the enforcement and market oversight
work of the regulator and the need for close cooperation between regulators.

Part III considers the practical implications of the objectives in securities regulation with
particular reference to issuers, collective investment schemes, market intermediaries,
secondary trading and the clearance and settlement of transactions.

Each substantive section in Parts II and III includes a boxed subsection that provides a
summary list of the principles to be addressed in giving effect to the objectives.

5
4. Objectives of Securities Regulation

4.1 Objectives of Securities Regulation

The three core objectives of securities regulation are:

The protection of investors;

Ensuring that markets are fair, efficient and transparent;

The reduction of systemic risk.

4.2 Discussion of the Objectives

The three objectives are closely related and, in some respects, overlap. Many of
the requirements that help to ensure fair, efficient and transparent markets also
provide investor protection and help to reduce systemic risk. Similarly, many of
the measures that reduce systemic risk provide protection for investors.

Further, matters such as thorough surveillance and compliance programs, effective

enforcement and close cooperation with other regulators are necessary to give
effect to all three objectives.

The aforementioned objectives of regulation are further described below. In

Parts II and III of the document the means to satisfy these objectives, articulated in
30 principles, are explored in greater detail in the context of actual market
structures and arrangements.

4.2.1 The Protection of Investors

Investors should be protected from misleading, manipulative or fraudulent

practices, including insider trading, front running or trading ahead of customers
and the misuse of client assets.

Full disclosure of information material to investors decisions is the most

important means for ensuring investor protection. Investors are, thereby, better
able to assess the potential risks and rewards of their investments and, thus, to
protect their own interests. As key components of disclosure requirements,
accounting and auditing standards should be in place and they should be of a high
and internationally acceptable quality.

Only duly licensed or authorised persons should be permitted to hold themselves

out to the public as providing investment services, for example, as market
intermediaries or the operators of exchanges. Initial and ongoing capital

6
requirements imposed upon those license holders and authorised persons should
be designed to achieve an environment in which a securities firm can meet the
current demands of its counter parties and, if necessary, wind down its business
without loss to its customers.

Supervision of market intermediaries should achieve investor protection by setting

minimum standards for market participants. Investors should be treated in a just
and equitable manner by market intermediaries according to standards which
should be set out in rules of business conduct. There should be a comprehensive
system of inspection, surveillance and compliance programs.

Investors in the securities markets are particularly vulnerable to misconduct by

intermediaries and others, but the capacity of individual investors to take action
may be limited. Further, the complex character of securities transactions and of
fraudulent schemes require strong enforcement of securities laws. Where a breach
of law does occur, investors should be protected through the strong enforcement
of the law.

Investors should have access to a neutral mechanism (such as courts or other

mechanisms of dispute resolution) or means of redress and compensation for
improper behaviour.

Effective supervision and enforcement depend upon close cooperation between

regulators at the domestic and international levels.

4.2.2 Ensuring that Markets are Fair, Efficient, and Transparent

The regulators approval of exchange and trading system operators and of trading
rules helps to ensure fair markets.

The fairness of the markets is closely linked to investor protection and, in

particular, to the prevention of improper trading practices. Market structures
should not unduly favour some market users over others. Regulation should
detect, deter and penalise market manipulation and other unfair trading practices.

Regulation should aim to ensure that investors are given fair access to market
facilities and market or price information. Regulation should also promote market
practices that ensure fair treatment of orders and a price formation process that is
reliable.

In an efficient market, the dissemination of relevant information is timely and

widespread and is reflected in the price formation process. Regulation should
promote market efficiency.

7
Transparency may be defined as the degree to which information about trading
(both for pre-trade and post-trade information) is made publicly available on a
real-time basis. Pre-trade information concerns the posting of firm bids and offers
as a means to enable investors to know, with some degree of certainty, whether
and at what prices they can deal. Post-trade information is related to the prices
and the volume of all individual transactions actually concluded. Regulation
should ensure the highest levels of transparency.

4.2.3 The Reduction of Systemic Risk

Although regulators cannot be expected to prevent the financial failure of market

intermediaries, regulation should aim to reduce the risk of failure (including
through capital and internal control requirements). Where financial failure
nonetheless does occur, regulation should seek to reduce the impact of that failure,
and, in particular, attempt to isolate the risk to the failing institution. Market
intermediaries should, therefore, be subject to adequate and ongoing capital and
other prudential requirements. If necessary, an intermediary should be able to
wind down its business without loss to its customers and counterparties or
systemic damage.

Risk taking is essential to an active market and regulation should not

unnecessarily stifle legitimate risk taking. Rather, regulators should promote and
allow for the effective management of risk and ensure that capital and other
prudential requirements are sufficient to address appropriate risk taking, allow the
absorption of some losses and check excessive risk taking. An efficient and
accurate clearing and settlement process that is properly supervised and utilises
effective risk management tools is essential.

There must be effective and legally secure arrangements for default handling.
This is a matter that extends beyond securities law to the insolvency provisions of
a jurisdiction.

Instability may result from events in another jurisdiction or occur across several
jurisdictions, so regulators responses to market disruptions should seek to
facilitate stability domestically and globally through cooperation and information
sharing.

8
5. The Regulatory Environment

Implicit throughout this document is the belief that regulation should facilitate capital
formation and economic growth. In the context of regulation, there should also be a
recognition of the benefits of competition in the market place.

Regulation is necessary to ensure the achievement of the three core objectives.

Nevertheless, inappropriate regulation can impose an unjustified burden on the market
and inhibit market growth and development.

It is possible to identify general attributes of effective regulation that are consistent with
sound economic growth:

there should be no unnecessary barriers to entry and exit from markets and
products;
the markets should be open to the widest range of participants who meet the
specified entry criteria;
in the development of policy , regulatory bodies should consider the impact of
the requirements imposed;
there should be an equal regulatory burden on all who make a particular
financial commitment or promise.

More generally, there must be an appropriate and effective legal, tax and accounting
framework within which the securities markets can operate. Securities law and regulation
cannot exist in isolation from the other laws and the accounting requirements of a
jurisdiction.

Matters of particular importance in the legal framework are set out in Annexure 3. This
Annexure is not intended to be an exhaustive list of matters to be addressed in domestic
legislation but rather to identify some matters that particularly impact upon the securities
markets5.

The accounting framework may also be considered an aspect of the legal framework but it
(particularly the preparation of financial statements) is discussed in the context of
disclosure by issuers in Section 10.

5
In addition, sound corporate governance practices are an important additional protection of the interests of
shareholders. Corporate governance is generally addressed through statute or exchange listing rules or code
of practice, the details of which are outside the scope of this document (see also Annex III).

9
 Part II

The Regulator
Part II describes the desirable attributes of a regulator6 and the potential role of
self-regulatory organizations, the enforcement and compliance work of the regulator and
the need for close cooperation between regulators.

6. The Regulator
6.1 Principles Relating to the Regulator

1 The responsibilities of the regulator should be clear and objectively stated.

2 The regulator should be operationally independent and accountable in the

exercise of its functions and powers.

3 The regulator should have adequate powers, proper resources and the capacity
to perform its functions and exercise its powers.

4 The regulator should adopt clear and consistent regulatory processes.

5 The staff of the regulator should observe the highest professional standards,
including appropriate standards of confidentiality.

6.2 Clear Responsibility7

The capacity of the regulator to act responsibly, fairly and effectively will be assisted by:

a clear definition of responsibilities, preferably set out by law;

strong cooperation among responsible authorities8, through appropriate
channels;
adequate legal protection for regulators and their staff acting in the bona fide
discharge of their functions and powers.

The packaging of products and services may be such that a single product or service
exhibits characteristics traditionally associated with at least two of the

6
In this document, the term regulator is used compendiously. There need not be a single regulator. In
many jurisdictions, the desirable attributes of the regulator described in this document are in fact the
shared responsibility of two or more government or quasi-government agencies.
7
See IOSCO Resolution 1.
8
Here the term responsible authorities encompasses those who are responsible for aspects of securities
regulation and other law enforcement governmental and regulatory bodies.

10
following: securities, banking and insurance. Legislation should be designed to ensure
that any division of responsibility avoids gaps or inequities in regulation. Where there is
a division of regulatory responsibilities, substantially the same type of conduct generally
should not be subject to inconsistent regulatory requirements.

6.3 Independence and Accountability

The regulator should be operationally independent from external political or commercial

interference in the exercise of its functions and powers and accountable in the use of its
powers and resources.

Independence will be enhanced by a stable source of funding for the regulator.

In some jurisdictions particular matters of regulatory policy require consultation with, or

even approval by, a government, minister or other authority. The circumstances in which
such consultation or approval is required or permitted should be clear and the process
sufficiently transparent or subject to review to safeguard its integrity. Generally, it is not
appropriate for these circumstances to include decision making on day to day technical
matters.

Accountability implies:

a regulator that operates independently of sectoral interests;

a system of public accountability of the regulator;
a system permitting judicial review of decisions of the regulator.

Where accountability is through the government or some other external agency, the
confidential and commercially sensitive nature of much of the information in the
possession of the regulator must be respected. Safeguards must be in place to protect
such information from inappropriate use or disclosure.

6.4 Adequate Powers and Proper Resources

The regulator should have adequate powers, proper resources and the capacity to perform
its functions and exercise its powers.

What this means in practical terms is the subject of elaboration in this document. It
includes powers of licensing, supervision, inspection, investigation and enforcement, all
of which are discussed in later sections.

It necessarily requires adequate funding for the regulator in order to enable the regulator
to exercise its tasks. The level of resourcing should recognize the difficulty of retaining
experienced staff who have skills that are valuable to the private sector.

The regulator must ensure that its staff receive ongoing training as required.

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6.5 Clear and Consistent Regulatory Processes

In exercising its powers and discharging its functions, the regulator should adopt
processes which are:
consistently applied;
comprehensible;
transparent to the public;
fair and equitable.

In the formulation of policy, the regulator should:

have a process for consultation with the public including those who may be
affected by the policy;
publicly disclose its policies in important operational areas9;
observe standards of procedural fairness;
have regard to the cost of compliance with the regulation.

Many regulators have authority to publish reports on the outcome of investigations or

inquiries, particularly where publication would provide useful guidance to market
participants and their advisers. Any publication of a report must be consistent with the
rights of an individual to a fair hearing and the protection of personal data, factors that
will often preclude publicity when a matter is still the subject of investigation.

Regulators should also play an active role in the education of investors and other
participants in capital markets.

6.6 The Conduct of Staff

Staff of the regulator should observe the highest professional standards and be given clear
guidance on conduct matters including:

the avoidance of conflicts of interest (including the conditions under which

staff may trade in securities);
the appropriate use of information obtained in the course of the exercise of
powers and the discharge of duty;
the proper observance of confidentiality and secrecy provisions and the
protection of personal data;
the observance of procedural fairness.

9
In some operational areas, and in some cases, particularly in the areas of surveillance and enforcement,
consultation and disclosure may be unnecessary or inappropriate as it may compromise the effective
implementation of the policy.

12
7. Self-Regulation10

7.1 Principles for Self-Regulation

6 The regulatory regime should make appropriate use of Self-Regulatory

Organizations (SROs) that exercise some direct oversight responsibility for
their respective areas of competence and to the extent appropriate to the size
and complexity of the markets.

7 SROs should be subject to the oversight of the regulator and should observe
standards of fairness and confidentiality when exercising powers and
delegated responsibilities.

7.2 The Role of SROs

SROs can be a valuable complement to the regulator in achieving the objectives of

securities regulation.

Various models of self-regulation exist and the extent to which self-regulation is used
varies. The common characteristics of SROs, in most jurisdictions are a separation from
the government regulator (although government oversight and authorization generally
exists), and the participation of business, industry and, if appropriate, investors in the
operations of the SRO.

There can be substantial benefits from self-regulation:

SROs may require the observance of ethical standards which go beyond

government regulations;
SROs may offer considerable depth and expertise regarding market operations
and practices, and may be able to respond more quickly and flexibly than the
government authority to changing market conditions.

SROs should undertake those regulatory responsibilities which they have incentives to
perform most efficiently. The actions of SROs will often be limited by applicable
contracts and rules.

7.3 Authorization and Oversight

The regulator should require an SRO to meet appropriate standards before allowing the
organization to exercise its authority. Oversight of the SRO should be ongoing.

10
Report of IOSCO Emerging Markets Committee, June 1996 (53) Legal and Regulatory Framework for
Exchange Traded Derivatives, at 6-9 and COSRA Report, Principles of Effective Market Oversight,
May 1995.

13
Moreover, once the SRO is operating, the regulator should assure itself that the exercise
of this power is in the public interest, and results in fair and consistent enforcement of
applicable securities laws, regulations and appropriate SRO rules.11

The effectiveness of an SRO may be compromised due to conflicts of interest. The

regulator should monitor and address the potential that may arise for conflict of interest.
The regulator must ensure that no conflict of interest arises because of the SROs access
to valuable information about market participants (whether or not they are members of
the SRO itself). The risk of conflict arising may be acute when the SRO is responsible
both for the supervision of its members and the regulation of a market sector.

As a condition to authorization, the legislation or the regulator should require an SRO to:

have the capacity to carry out the purposes of governing laws, regulations and
SRO rules, and to enforce compliance by its members and associated persons
with those laws, regulations, and rules;
treat all members of the SRO and applicants for membership in a fair and
consistent manner;
develop rules that are designed to set standards of behaviour for its members
and to promote investor protection;
submit to the regulator its rules for review and / or approval as the regulator
deems appropriate, and ensure that the rules of the SRO are consistent with the
public policy directives established by the regulator;
cooperate with the regulator and other SROs to investigate and enforce
applicable laws and regulations;
enforce its own rules and impose appropriate sanctions for non-compliance;
assure a fair representation of members in selection of its directors and
administration of its affairs;
avoid rules that may create uncompetitive situations; and
avoid using the oversight role to allow any market participant unfairly to gain
advantage in the market.

Regardless of the extent to which self-regulation is used, the government regulator should
retain the authority to inquire into matters affecting investors or the market. Where the
powers of an SRO are inadequate for inquiring into or addressing particular misconduct
or where a conflict of interest necessitates it, the regulator should take over the
responsibility for an inquiry from an SRO. It is important, therefore, to ensure that the
information provided by the SRO to the regulator allows these matters to be identified at
an early stage.

SROs should follow similar professional standards of behaviour on matters such as

confidentiality and procedural fairness as would be expected of the regulator.12

11
COSRA Report Principles of Effective Market Oversight, May 1995.
12
SROs are generally non-governmental agencies and so will not always be subject to the same standards
as apply to a government agency.

14
8. Enforcement of Securities Regulation

8.1 Principles for the Enforcement of Securities Regulation

8 The regulator should have comprehensive inspection, investigation and

surveillance powers.

9 The regulator should have comprehensive enforcement powers.

10 The regulatory system should ensure an effective and credible use of

inspection, investigation, surveillance and enforcement powers and
implementation of an effective compliance program.

8.2 Inspection and Compliance Programs13

Supervision of market intermediaries conduct through inspection and surveillance helps

to ensure the maintenance of high standards and the protection of investors. These
preventative programs are a necessary complement to investigation and enforcement
programs.

The regulator should have the power to require the provision of information14 or to carry
out inspections of business operations whenever it believes it necessary to ensure
compliance with relevant standards. The suspicion of a breach of law should not be a
necessary prerequisite to use of inspection powers in respect of authorized or licensed
persons.

Inspections may be carried out by the regulator itself or another competent authority.
Alternatively, the regulator might consider delegating such authority to SROs or using
third parties, properly supervised, to carry out some of this inspection work on its behalf.
These third parties should also be subject to disclosure and confidentiality requirements.
Such inspections must be carried out with adequate instruments and techniques, and these
may vary between jurisdictions.

In some areas, for example the scrutiny of trading on an exchange, the use of technology
will be necessary for effective regulation. In other areas, including the inspection of
broker conduct, consideration needs to be given to the balance between on-site inspection
and interview and the requirement to provide information from time to time which can be
reviewed off-site.

Inspection visits may be rotational or driven by risk assessment or complaint. In making

decisions on the efficient use of resources, the regulator must consider both the need for

13
See IOSCO Resolutions 9, 39 and 40.
14
Here the information to be provided may include records kept in the ordinary course of business,
information prepared in response to a particular inquiry or as part of a regulator reporting cycle.

15
wide market coverage and the importance of adequate inspection in areas of high risk to
investors or which threaten systemic stability.

8.3 Comprehensive Enforcement Powers15

The complex character of securities transactions and the sophistication of fraudulent

schemes require strong and rigorous enforcement of securities laws. Investors in the
securities markets are particularly vulnerable to misconduct by intermediaries and others.

The regulator or other competent government authority should, therefore, be provided

with comprehensive investigatory and enforcement powers including:

regulatory and investigative powers to obtain data, information, documents

statements and records from persons involved in the relevant conduct or who
may have information relevant to the inquiry;
power to seek orders and/or to take other action to ensure compliance with
these regulatory, administrative and investigation powers;
power to impose administrative sanctions and / or to seek orders from courts
or tribunals;
power to initiate or to refer matters for criminal prosecution;
power to order the suspension of trading in securities or to take other
appropriate action;16
where enforcement action is able to be taken, the power to enter into
enforceable settlements and to accept binding undertakings.

As a general matter, these enforcement powers should not compromise private rights of
action. Private persons should be able to seek their own remedies (including, for
example, for compensation or specific performance of an obligation).

It is not necessary that the responsibility for all aspects of enforcement of the securities
law be given to a single body. There are several models that have been shown to be
effective. These include models in which responsibilities are shared between several
government or quasi-government agencies or where responsibility is shared with SROs.

The sharing of responsibility and the need for close cooperation may be particularly
important in ensuring that only those who have necessary authorization are active
participants on the markets; unlicensed persons should be prosecuted.

15
See IOSCO Resolutions 35, 37, 39 and 40.
16
Other action may include the imposition of trading restrictions or requirements on individual market
participants. For example, position limits, reporting requirements, liquidation only trading or special
margin requirements.

16
8.4 International Enforcement

The international nature of the securities markets and the fact that, frequently, a course of
conduct will cross several jurisdictions give rise to a number of particular issues.

Legislation and the enforcement powers of the regulator should be sufficient to ensure
that it can be effective in cases of cross-border misconduct. Therefore, the regulator
should strive to ensure that it or another authority in its jurisdiction has the necessary
authority to obtain information, including statements and documents, that may be
relevant to investigating and prosecuting potential violations of laws and regulations
relating to securities transactions, and that such information can be shared directly with
other regulators or indirectly through authorities in their jurisdictions for use in
investigations and prosecutions of securities violations.17

The general topic of international cooperation and its importance to effective regulation is
addressed in Section 9.

8.5 Money Laundering18

The term money laundering covers a wide range of activities and processes intended to
obscure the source of illegally obtained money and to create the appearance that it has
originated from a legitimate source.

Securities regulators should consider the sufficiency of domestic legislation to address the
risks of money laundering. The regulator should also require that market intermediaries
have in place policies and procedures designed to minimize the risk of the use of an
intermediarys business as a vehicle for money laundering.

17
Resolution on Enforcement Powers, IOSCO Presidents Committee. November 1997.
18
See generally Report of IOSCO Technical Committee, October 1992 (25) Report on Money
Laundering.

17
9. Cooperation in Regulation
9.1 Principles for Cooperation in Regulation

11 The regulator should have authority to share both public and non-public
information with domestic and foreign counterparts.

12 Regulators should establish information sharing mechanisms that set out when
and how they will share both public and non-public information with their
domestic and foreign counterparts.

13 The regulatory system should allow for assistance to be provided to foreign

regulators who need to make inquiries in the discharge of their functions and
exercise of their powers.

9.2 The Need for Domestic Cooperation19

There may be an important need to share information at a domestic level where regulatory
divisions based on institutional form exist or where the securities law overlaps with the
general law of a jurisdiction. So, for example, cases of fraud or money laundering that
involve dealings in securities may require close cooperation between two or more
domestic regulators, including law enforcement, regulatory and judicial authorities.

The need for domestic cooperation may extend beyond matters of enforcement and
include information relevant to authorisation to act in a particular capacity and the
reduction of systemic risk, for example, where there are divisions in responsibility for the
securities, banking and other financial sectors.

9.3 The Need for International Cooperation

International cooperation between regulators is necessary for the effective regulation of

domestic markets. The inability to provide regulatory assistance can seriously
compromise efforts towards effective securities regulation. Domestic laws need to
remove impediments to international cooperation.20

The increasing internationalization of financial activities and the globalization of markets

mean that information relevant to authorisations or approvals is often beyond the
immediate jurisdictional reach of the competent regulator. For example, an application
for a licence may be received from a person known to be registered in another
jurisdiction, or registration may be sought for the same offer documents in several
jurisdictions.

19
See IOSCO Resolutions 9, 19, 20, 23 26, 28, 33, 34 and 40.
20
Report on the Self-Evaluation Conducted by IOSCO Members Pursuant to the 1994 Resolution on
Commitment to Basic IOSCO Principles of High Regulatory Standards and Mutual Cooperation and
Assistance, November 1997 (75). See also IOSCO Resolutions 39 and 40.

18
Similarly, threats to systemic stability are not confined to domestic factors and may
include the behaviour of individual financial institutions in another jurisdiction.
Regulators must consider whether they have adequate information sharing arrangements
with regulators in other jurisdictions to allow them to identify and address these threats.

Further, an increasing number of companies have securities listed in more than one
jurisdiction and it is common for a significant part of an issuers commercial activity to
take place in a country other than the one in which its stock is listed. Investors frequently
invest in foreign markets and securities either directly or in managed funds. An
increasing number of collective investment schemes are marketed across jurisdictional
boundaries. It is also common for scheme promoters, managers and custodians to be
located in several different jurisdictions and they may not be in the same jurisdiction as
investors to whom the scheme is promoted.

Similar financial products may be traded on various markets in several countries;

moreover, there are many derivatives in which the underlying product or reference price
is traded, produced or derived on foreign markets.

Fraud, market manipulation, insider trading and other illegal conduct that crosses
jurisdictional boundaries can and does occur more and more frequently in a global market
aided by modern telecommunications.

The importance of international cooperation in investigations and inquiries into possible

breach is also apparent from some of the common characteristics of breaches of securities
law, such as shifting the proceeds of crime to foreign jurisdictions; wrongdoers fleeing to
a foreign country; routing transactions through foreign jurisdictions to disguise the
identity of parties or the flow of funds; the use of foreign accounts to hide beneficial
ownership of shares; and the facilitation of cross-border breaches through the use of
international communications media, including the Internet.

In circumstances such as those described above, effective regulation can be compromised

when necessary information is located in another jurisdiction and is not available or
accessible.21

Cooperative mechanisms should, therefore, be put into place at the international level
to facilitate the detection and deterrence of cross-border misconduct and to assist in the
discharge of licensing and supervisory responsibilities. Among these are memoranda
of understanding.

21
See IOSCO Resolutions 9, 19, 20, 23 26, 28, 33, 34 and 40, 1994 Resolution of IOSCO Presidents
Committee on Commitment to Basic IOSCO Principles of High Regulatory Standards and Mutual
Cooperation and Assistance. See IOSCO Resolution 31. 1997 Resolution of IOSCO Presidents
Committee on Principles for Record Keeping, Collection of Information, Enforcement Powers and
Mutual Cooperation to Improve the Enforcement of Securities and Futures Laws.

19
9.4 The Scope of Cooperation

The form and content of the cooperation will vary from case to case22. It is important that
assistance can be provided not only for use in investigations but also for other types of
inquiry, as part of a compliance program for the purpose of preventing illicit activities.
There may also be a need to exchange general information about matters of regulatory
concern, including financial and other supervisory information, technical expertise,
surveillance and enforcement techniques, and investor education.

Memoranda of understanding or other documented arrangements help to add certainty to

the process of information exchange.23 Nevertheless, the mere formality of an
arrangement is no substitute for a close and cooperative arrangement.

These arrangements, whether formal or informal, should have several basic

characteristics:

identification of the circumstances under which assistance may be sought;

identification of the types of information and assistance that can be provided;
safeguards of the confidentiality of information transmitted;
a description of the permitted uses of the information.

The design of these information sharing mechanisms should take into account the
following factors:

which market authority or regulator has access to and is able to provide the
information or assistance;
how such access can be obtained under applicable law;
confidentiality and use restrictions under applicable law;
the form and timing of the assistance or information sharing;
the applicability of other arrangements, including MOUs, between such
authorities for sharing investigative and financial information.

The arrangements may also provide for the limitation of liability and the rights of third
parties, routine consultations between authorities, and a public policy exception to the
provision of information.

Where assistance to another authority is provided through the provision of confidential

information gathered by the regulator in the exercise of its functions or powers,
22
The latter may require, for example, among other things: routine sharing of information on questionable
activities and proven frauds; information on any concern about an applicant for licensing, listing or
registration; information about the current circumstances of a license holder or issuer; information that
may be needed to minimize the adverse effects of market disruptions, including contingency plans,
contact persons and structural measures to address market disruption; and information on market
conditions such as actions taken by market authorities, prices, trading activities, and market data.
23
As to the content of memoranda of cooperation, see generally Report of IOSCO Technical Committee
September 1991 (17) Principles of Memoranda of Understanding.

20
particular care must be taken to ensure that the information is provided subject to
conditions which, to the extent consistent with the purpose of the release, preserve the
confidentiality of that information.

The removal of any dual illegality conditions to information sharing and regulatory
cooperation is important. As a transitional matter, while a jurisdiction moves towards
the removal of dual illegality conditions, it is important that any conditions be
interpreted flexibly and in a manner that minimises impact upon international
cooperation.

Assistance in taking substantive action may also be necessary. When it is within their
powers, regulators can more effectively enforce securities laws when they are able to
prevent the dissipation or secreting of the fruits of fraud or other misconduct, thus
facilitating the return of money to injured investors.24

The form of assistance may include:25

assistance in obtaining public or non-public information, for example, about a

licence holder, listed company, shareholder, beneficial owner or a person
exercising control over a licence holder or company;
assistance in obtaining banking, brokerage or other records;
assistance in obtaining voluntary cooperation from those who may have
information about the subject of an inquiry;
assistance in obtaining information under compulsion - either or both the
production of documents and oral testimony or statements;
assistance in providing information on the regulatory processes in a
jurisdiction, or in obtaining court orders, for example, urgent injunctions.

9.5 Cooperation on Financial Conglomerates26

The growing emergence of financial conglomerates that combine the activities of firms in
different financial sectors and, in some jurisdictions, of financial and non-financial firms
has heightened the need for cooperative efforts to improve the effectiveness of
supervisory methods and approaches. Without proper cooperation between regulators it
may be difficult to be aware of all the activities of a group. Such cooperation is
particularly important when, as is commonly the case, the group is active in several
jurisdictions.

The particular procedures used for the supervision of financial conglomerates must
reflect the domestic law of the places in which they operate and must take account of the

24
Report of IOSCO Technical Committee, July 1996 (55) Measures Available on a Cross-Border Basis
to Protect Interests and Assets of Defrauded Investors.
25
Report of IOSCO Technical Committee, October 1994 (41) Report on Issues Raised for Securities and
Futures Regulators by Under-Regulated and Uncooperative Jurisdictions.
26
IOSCO Consultation Paper (1), Supervision of Financial Conglomerates, February 1998.

21
possibility that relevant regulatory responsibility may continue to be shared between
agencies. It is nevertheless possible to identify some general issues that should be
considered as matters requiring close supervisory cooperation:

Structure of financial conglomerates;

Capital requirements in conglomerate groups;
Investments in companies within the same group;
Intra group exposures and group-wide exposures;
Relationships with shareholders;
Management responsibility and the control of regulated entities.

It is also appropriate to consider the regulators capacity to exchange information with

other regulators, for example in the banking and insurance sectors at both the domestic
and international levels. Again, such exchanges of information must be consistent with
the proper maintenance of confidentiality and the protection of personal data.

22
 Part III

Issuers, Market Intermediaries, and Secondary

Markets

Part III considers the implementation of the objectives of regulation in the day to day
regulation of the market with particular reference to issuer disclosure, the conduct of
market intermediaries, secondary trading and the clearance and settlement of
transactions.

10. Issuers27

10.1 Principles for Issuers

14 There should be full, accurate and timely disclosure of financial results and
other information which is material to investors decisions.

15 Holders of securities in a company should be treated in a fair and equitable

manner.

16 Accounting and auditing standards should be of a high and internationally

acceptable quality.

10.2. The Scope of this Section and the Need to Regulate Issuers

This section is mainly concerned with the public offering and trading of securities. It
therefore concerns the content of advertising, and information about issuers, offerings,
listing, periodic reports and reports of material events, takeovers or the change in control
or change of interest associated with the holding of a publicly traded security.28

The term issuer should be understood broadly. It includes all those who raise funds on
the market. However, those who offer interests in collective investment schemes are dealt
with in the subsequent section.29 Disclosure requirements of the type described in

27
The obligation to make relevant disclosure is not limited to issuers. It will be apparent from the text
where others have a relevant obligation.
28
Most jurisdictions separately regulate public offerings thereby ensuring general protection of the public
while reducing the regulatory burden in the case of non-public undertakings. The definition of what
amounts to an offer to the public varies as does the threshold for what constitutes public trading.
29
Derivatives markets are in a separate category. The market operators and intermediaries must ensure,
among other things, proper disclosure of the terms of contracts traded, the mechanics of trading and
the generic risks related to gearing or leverage.

23
section 10.4 may extend beyond the issuer to include others, such as directors and senior
officers of the company, participating underwriters, and material shareholders.

Regulation of issuers should ensure both investor protection and a fair, orderly and
efficient market. Annexure 3 describes some of the other laws necessary to
complement securities regulation. Of particular importance in this context are:

company formation;
duties of directors and officers;
regulation of takeover bids and other transactions intended to effect a change
in control;
laws governing the issuance of securities;
disclosure of information to security holders to enable informed voting
decisions;
disclosure of material shareholdings;
insolvency law.

10.3 Timely Disclosure of Information

Investors should be provided with the information necessary to make informed

investment decisions on an ongoing basis. The principle of full, timely and accurate
disclosure of current and reliable information material to investment decisions is
directly related to the objectives of investor protection and fair, efficient and
transparent markets.

10.4 When Disclosure is Required

Disclosure rules should extend to, at least:30

the conditions applicable to an offering of securities for public sale;

the content and distribution of prospectuses or other offering documents (and,
where relevant, short form profile or introductory documents);
supplementary documents prepared in the offering;
advertising in connection with the offering of securities;
information about those who have a significant interest in a listed company;
information about those who seek control of a company (discussed in greater
detail below);
information material to the price or value of a listed security;
periodic reports;
30
See Report of IOSCO Technical Committee, September 1991 (16) International Equity Offers and
(38), (61) and (70). See also Reports of IOSCO Development Committee, October 1992 (24) Report
on Disclosure Requirements and October 25, 1993 (32) Report on Disclosure, Report of
IOSCO Technical Committee, October 1994 (39) Report on Disclosure and Accounting and Report of
IOSCO Emerging Markets Committee, September 1996 (62) Reporting of Material Events in Emerging
Markets.. See also IOSCO Report, September 1998, International Disclosure Standards for Cross-
Border Offerings and Initial Listings by Foreign Issuers.

24
 shareholder voting decisions

Disclosure should be clear, reasonably specific and timely. Specific disclosure

requirements should be augmented by a general disclosure requirement. Such a general
disclosure requirement can provide that disclosure is required of all material information
that is relevant to a particular investment decision. Another approach for such a general
disclosure requirement provides that disclosure is required of all material information that
is necessary to keep disclosures made from being misleading 31.

Regulation should ensure the sufficiency and accuracy of information. Generally this
will involve sanctions or liability on the issuer company and those responsible persons
who fail to exercise due diligence in the gathering and provision of information.
Regulation should ensure that proper responsibility is taken for the content of
information and, depending upon the circumstances, those liable to take responsibility
may include the issuing company, underwriters, promoters, directors, authorizing
officers of the company, and those experts and advisers who consent to be named in the
documentation or provide advice.

Regulators also need to give careful consideration to the circumstances in which it may
be necessary to the proper functioning of the market to allow something less than full
disclosure: for example, of trade secrets or incomplete negotiations. In the limited
circumstances where the market requires some derogation from the objective of full and
timely disclosure, there may need to be temporary suspensions from trading or
restrictions on the trading activities of those who possess more complete information.
In such circumstances, trading should be prohibited in the absence of full disclosure.

10.5 Information About Corporate Control

To safeguard the fair and equitable treatment of shareholders, regulation should require
disclosure of the security holdings of management and of those persons who hold a
substantial beneficial ownership interest in a company. This is generally regarded as
information necessary to informed investment decisions in the secondary market.

The level at which disclosure is required varies from jurisdiction to jurisdiction, but is
generally set at a level well below that which would be characterized as a controlling
interest. More stringent disclosure requirements may be appropriate for persons
contemplating exercise of control.

The nature of the disclosure required also varies but full public disclosure is generally
thought to best meet the underlying policy rational of disclosure where a change in
31
Reference should also be made to so-called merit based regulation in which the regulator takes some
responsibility for assessing the quality of a proposed offering. This approach is generally associated
with developing markets and may be of particular benefit where a market lacks a group of analysts and
advisers who could analyse information if it were made publicly available. It is therefore, generally
regarded as transitional and not necessary in a fully developed market.

25
control of a company has occurred or is contemplated. Regulation should have regard
to the information needs of the shareholders of the subject company.

The information necessary to enable informed decision making will vary with the
nature of the transaction but the general objective remains true for cash offers, offers by
way of tender and exchange, business combinations and privatizations. Generally, in
the circumstances described in the preceding sentence, this will require that
shareholders of a company:

have a reasonable time in which to consider any offer under which a person
would acquire a substantial interest in the company;
are supplied with adequate information to enable them to assess the merits
of any proposal under which a person would acquire a substantial interest in
the company;
as far as practicable, have reasonable and equal opportunities to participate
in any benefits accruing to the shareholders under any proposal under which
a person would acquire a substantial interest in the company;
receive fair and equal treatment (in particular, minority shareholders) in
relation to the proposal;
are not unfairly disadvantaged by the treatment and conduct of the directors
of any party to the transaction or by the failure of the directors to act in good
faith in responding to or making recommendations with respect to the
proposal.

10.6 Accounting and Auditing Standards

Comparability and reliability of financial information are critical to informed decision

making. The objective of general purpose financial statements is to provide information
about the financial position, results of operations, cash flow and changes in the ownership
equity of an enterprise that is useful to a wide range of users for decision making
purposes. The statements should be characterized by comprehensibility, consistency,
relevance, reliability and comparability. Financial statements should also show the
results of the stewardship of management or the accountability of management for the
resources entrusted to it. High quality accounting and auditing standards provide a
framework for other disclosure obligations.

Accounting and auditing standards are necessary safeguards of the reliability of financial
information.

Accounting standards should ensure that fundamental information is available. There

should be comprehensive and well-defined accounting principles that are of a high and
internationally acceptable quality, and provide accurate and relevant information on
financial performance.

Regulation should be intended to ensure:

26
 The timeliness and relevance of the information provided to investors and
potential investors.
An appropriate mechanism for the setting of quality standards and to ensure
that where there is some dispute or uncertainty, standards can be the subject of
authoritative and timely interpretation that is consistently applied.
An independent verification of financial statements and compliance with
accounting principles through professional external auditing.
Any audit is conducted pursuant to well defined and internationally acceptable
standards.
Rules designed to ensure the independence of the auditor.
That where a set of international standards acceptable to the regulator is
available, their use should be permitted to facilitate efficient cross-border
capital raising as an aid to the provision of internationally comparable
information and to assist in the more efficient raising of capital.32
A mechanism for enforcing compliance with accounting and auditing
standards.

32
See IOSCO Resolution 12.

27
11. Collective Investment Schemes33

11.1 Principles for Collective Investment Schemes

17 The regulatory system should set standards for the eligibility and the
regulation of those who wish to market or operate a collective investment
scheme.

18 The regulatory system should provide for rules governing the legal form and
structure of collective investment schemes and the segregation and protection
of client assets.

19 Regulation should require disclosure, as set forth under the principles for
issuers, which is necessary to evaluate the suitability of a collective
investment scheme for a particular investor and the value of the investors
interest in the scheme.

20 Regulation should ensure that there is a proper and disclosed basis for asset
valuation and the pricing and the redemption of units in a collective
investment scheme.

11.2 Scope of this Section

The term collective investment scheme includes authorized open ended funds that will
redeem their units or shares, whether on a continuous basis or periodically. It also
includes closed end funds whose shares or units are traded in the securities market. It
further includes, unit investment trusts, contractual models and the European UCITS
(Undertakings for Collective Investment in Transferable Securities) model.34

The legal form taken by collective investment schemes varies between jurisdictions but
in all jurisdictions they are becoming increasingly important as a means for investors to
achieve a diversified exposure to investment opportunities.

Proper regulation of collective investment schemes is critical to the objective of investor

protection and should ensure that investors have access to a fair market. Investors in
collective investment schemes rely upon operators of the schemes to manage their funds
and to act in their best interests.

33
See generally Report of IOSCO Technical Committee, October 1994 (40) Report on Investment
Management and Report of IOSCO Technical Committee, September 1997 (68) Principles for the
Supervision of Operators of Collective Investment Schemes.
34
In some jurisdictions, closed end funds are not subject to special licensing or supervisory requirements
and are, instead, regulated according to the terms of relevant exchange listing rules.

28
11.3 Eligibility to Act as an Operator

There should be clear criteria for eligibility to operate a collective investment scheme.
Investor protection is the key objective and to the extent that a regulatory regime imposes
specific requirements, factors that may be considered include:

Honesty and integrity of the operator;

Competence to carry out the functions and duties of a scheme operator;
Financial capacity;
Operator specific powers and duties;
Internal management procedures.

11.4 Supervision of Conduct, Conflicts of Interest and Delegation

The regulatory system should require supervision throughout the life of a particular
scheme. Supervision of an operator should promote high standards of competence,
integrity and fair dealing. There should be clear powers with respect to:

Registration and authorization of a scheme;

Inspections to ensure compliance by scheme operators;
Investigations of suspected breaches;
Remedial action in the event of breach or default.

These powers should be sufficient to allow action in respect of all supervised entities
with responsibilities under the scheme.

To assist in supervision and to promote compliance, there should also be clear

responsibilities for maintaining records of the operations of the scheme.

The operation of a collective investment scheme raises the potential for conflict between
the interests of investors in the scheme and those of scheme operators or their associates.
Regulation should ensure that the possibility of conflict arising is minimized and that any
conflicts which do arise are properly disclosed. Operators should not benefit to the unfair
disadvantage of investors in a scheme. Generally this will require regulation covering
topics such as best execution, appropriate trading and timely allocation of transactions,
commissions and fees, related party transactions and underwriting arrangements.

It is common for aspects of the operation of collective investment schemes to be carried

out by delegates. The use of delegates should not, in any way, be permitted to diminish
the effectiveness of the primary regulation of a collective investment scheme. A delegate
should comply with all regulatory requirements applicable to the conduct of the
principals business activities.

29
11.5 Legal Form and Structure35

The regulatory system should address the legal form and structure of collective
investment schemes to enable investors to assess their interests and rights and to enable
the pool of investors funds to be distinguished and segregated from the assets of other
entities.

The legal form and structure chosen for collective investment schemes have implications
for the nature of the risk of default or breach associated with the scheme. It must be
disclosed to investors.

The regulatory system must ensure that these risks to investors are addressed either
through statute, conduct rules or mandatory covenants in the constituent documents of a
scheme.

11.6 Disclosure to be Made to Investors

There should be a requirement that matters material to the value of the scheme are the
subject of disclosure to investors and potential investors. Disclosure about a collective
investment scheme should assist investors in understanding the nature of the investment
vehicle and the relationship between risk and return, so that investors evaluating scheme
performance do not focus solely on return, but also on the risk assumed to produce the
return.36 However, investors should be free to choose the level of market risk to which
they are exposed. There should also be clear disclosure of investment policies.

The goal of disclosure should be to:

provide investors with sufficient information to evaluate whether and to what

extent the scheme is an appropriate investment vehicle for them;
provide information on a timely basis, in an easy to understand format, having
regard to the type of investor.

One particular aspect of disclosure requiring close attention is the disclosure of all fees
and other charges that may be levied under the scheme.

Supervision of an operator of a collective investment scheme should ensure that the

stated investment policy or trading strategy of the scheme or any policy required under
regulation has been followed and that any restrictions on the type or level of investment
have been complied with.

35
See generally Report of IOSCO Technical Committee, September 1996 (60) Guidance on Custody
Arrangements for Collective Investment Schemes.
36
See generally Report of IOSCO Technical Committee, September 1996 (59) Disclosure of Risk - A
Discussion Paper.

30
11.7 Client Asset Protection37

Regulators should recognize the benefits for investor protection and confidence in
financial markets of effective mechanisms to protect client assets from the risk of loss
and the insolvency of investment firms. Client assets include money, securities and
positions, including, in the case of derivatives, accruals thereof or the proceeds thereof,
that are held or controlled on behalf of investors in a collective investment scheme.

Regulators should enforce within their jurisdictions those mechanisms which best
achieve the overall objective of client asset protection, taking into account their
insolvency and investment services laws, regulations and practices, and the needs of
market efficiency and investor protection.

Regulators should review the adequacy of arrangements within their jurisdiction to

ensure that client securities in the course of settlement are not mixed with those
belonging to the investment firm.

11.8 Asset Valuation and Pricing

Regulation should seek to ensure that all of the property of a collective investment
scheme is fairly and accurately valued and that the net asset value of the scheme is
correctly calculated.38 Information about asset value and pricing should allow the
investor to assess performance over time. The interests of the investor are generally
better protected by the use of value based reporting wherever reliable market or fair
values can be determined.39

11.9 Redemption of Interest in a Scheme

The law or rules governing collective investment schemes should enable investors to
redeem units upon a basis that is made clear in the constituent documents and should
ensure that rights of suspension protect the interest of investors. Regulators should be
kept informed of any suspension of redemption rights.

37
See generally Report of IOSCO Technical Committee, August 1996 (57) Client Asset Protection and
IOSCO Resolution 20.
38
Report of IOSCO Technical Committee, September 1997 (68) Principles for the Supervision of
Operators of Collective Investment Schemes.
39
A mandatory requirement in some jurisdictions.

31
11.10 International Regulatory Cooperation40

An increasing number of collective investment schemes are marketed across

jurisdictional boundaries. It is also common for scheme promoters, managers and
custodians to be located in several different jurisdictions and they may not be in the same
jurisdiction as investors to whom the scheme is promoted.41 The approval of schemes
should have regard to the possible need for international cooperation. These matters are
addressed more generally in Section 9.3.

40
See generally Report of IOSCO Technical Committee, June 1996 (54) Regulatory Cooperation in
Emergencies - A Discussion Paper.
41
See generally Report of IOSCO Technical Committee, June 1996 (52) Discussion Paper on
International Cooperation in Relation to Cross-Border Activity of Collective Investment Schemes.

32
12. Market Intermediaries

12.1 Principles for Market Intermediaries

21 Regulation should provide for minimum entry standards for market

intermediaries.

22 There should be initial and ongoing capital and other prudential requirements
for market intermediaries that reflect the risks that the intermediaries
undertake.

23 Market intermediaries should be required to comply with standards for

internal organization and operational conduct that aim to protect the interests
of clients, ensure proper management of risk, and under which management of
the intermediary accepts primary responsibility for these matters.

24 There should be a procedure for dealing with the failure of a market

intermediary in order to minimize damage and loss to investors and to contain
systemic risk.

12.2 Scope of this Section

In this section the expression market intermediaries generally includes those who are in
the business of managing individual portfolios, executing orders, dealing in or
distributing securities and providing information relevant to the trading of securities.

Regulation for the various types of intermediaries should address entry criteria, capital
and prudential requirements, ongoing supervision and discipline of entrants, and the
consequences of default and financial failure.

The oversight of market intermediaries should primarily be directed to the areas where
their capital, client money and public confidence may most be put at risk42. These
include the risks that:

incompetence or poor risk management may lead to a failure of due execution,

a failure to obtain due settlement or a failure to provide adequate advice;

42
See IOSCO Resolutions 13 and 27. See also Reports of IOSCO Technical Committee, May 1998,
Methodologies for Determining Minimum Capital Standards for Internationally Active Securities Firms
Which Permit the Use of Models Under Prescribed Conditions (77); and Risk Management and Control
Guidance for Securities Firms and their Supervisors, May 1998 (78), and IOSCO Resolution 18, and, in
particular, the discussion of the various types of risk that market intermediaries may have to address:
Market Risk, Credit Risk, Liquidity Risk, Operational Risk, Legal Risk and Systemic Risk. See also
Framework for Disclosure of Trading and Derivatives Activities of Banks and Securities Firms (81),Joint
Report by the Basle Committee on Banking Supervision and by the Technical Committee of IOSCO
(Sept.2, 1998).

33
 breach of duty may lead to misappropriation of client funds or property, the
misuse of client instructions for the intermediarys own trading purposes
(front running or trading ahead of customers), manipulation and other
trading irregularities, or fraud on the part of the intermediary or its employees;
the insolvency of an intermediary may result in loss of client money, securities
or trading opportunities, and may reduce confidence in the market in which
the intermediary participates.

12.3 Licensing and Supervision

The licensing43 and supervision of market intermediaries should set minimum standards
for market participants and provide consistency of treatment for all similarly situated
intermediaries. It should also reduce the risk to investors of loss caused by negligent or
illegal behaviour or inadequate capital.

The licensing process should require a comprehensive assessment of the applicant and all
those who are in a position to control or materially influence the applicant.

The licensing authority should have the power to reject applications that do not meet the
standards set.

The licensing authority should also have the power to withdraw or suspend the license or
otherwise sanction the licensee whenever the entry criteria are not fulfilled.

Changes of control or material influence should be made known to the competent

authority in order to ensure that its assessment on the intermediary remains valid. The
regulator should be empowered to withdraw a licence or authorization where a change in
control results in a failure to meet relevant requirements.

The following matters should be the subject of consideration:

Regulation should set conditions of entry that make clear the basis of
participation. The entry conditions should be consistently applied and need
not be determined by the regulator, but where for example it is the
responsibility of a self-regulatory organization, the process should be subject
to appropriate oversight by the regulator.
Regulation should determine whether participation in the market by an
intermediary should be based upon a demonstration of appropriate knowledge,
resources, skills and ethical attitude (including a consideration of past
conduct).44

43
In some jurisdictions, authorization or registration is used instead of licensing.
44
Many jurisdictions set out detailed criteria relating to education, training, experience and the so called
fitness and properness of an applicant to be met before a person may be licensed. These criteria are
intended to protect the investor.

34
 The regulator should have the authority to refuse licensing of an intermediary
if these requirements have not been met.
There should be an initial capital requirement for securities firms as a
condition of entry into the market. This ensures that the owners of the
business have a direct financial stake in the business. The capital requirement
should be maintained and should be the subject of periodic reporting to the
regulator or competent SRO. The ongoing capital requirement should be
directly related to the nature and amount of business undertaken by an
intermediary. The financial position of the intermediary should be regularly
audited by independent auditors.

To ensure that continued licensing remains appropriate, there should be a requirement for
periodic updating of relevant information and a requirement for reporting material
changes in circumstances affecting the conditions of licensing.

To enable investors to better protect their own interests, the regulator should ensure that
the public have access to relevant information concerning the licensee, such as the
category of license held, the scope of its authorized activities, the identity of senior
management and those authorized to act in the name of the intermediary.45

12.4 Capital Adequacy46

The protection of investors and stability of financial systems are increased by an

adequate supervision of ongoing capital standards.

Capital adequacy standards47 foster confidence in the financial markets and should be
designed to allow a firm to absorb some losses, particularly in the event of large
adverse market moves, and to achieve an environment in which a securities firm could
wind down its business over a relatively short period without loss to its customers or
the customers of other firms and without disrupting the orderly functioning of the
financial markets. Capital standards should be designed to provide supervisory
authorities with time to intervene to accomplish the objective of orderly wind down.

A firm should ensure that it maintains adequate financial resources to meet its business
commitments and to withstand the risks to which its business is subject. Risk may result
from the activities of unlicensed and off balance sheet affiliates and regulation should
consider the need for information about the activities of these affiliates.

45
The information must be freely available and readily accessible. It may be maintained in a central
repository by the regulator or by an SRO.
46
See Reports of IOSCO Technical Committee, May 1998, Methodologies for Determining Minimum
Capital Standards for Internationally Active Securities Firms Which Permit the Use of Models Under
Prescribed Conditions (77); and Risk Management and Control Guidance for Securities Firms and their
Supervisors, May 1998 (78), See also IOSCO Resolution 18..
47
See Report of IOSCO Technical Committee, November 13, 1990 (14) Capital Requirements for
Multinational Securities Firms.

35
A capital adequacy test should address the risks faced by securities firms judged by
reference to the nature and amount of the business undertaken by the firm.

12.5 The Conduct of Business Rules and Other Prudential Requirements48

Market intermediaries should conduct themselves in a way that protects the interests of
their clients and helps to preserve the integrity of the market.49

The management of a market intermediary should bear primary responsibility for

ensuring the maintenance of appropriate standards of conduct and adherence to proper
procedures by the whole firm. This includes the proper management of the risks
associated with the business of the intermediary.50 Regulation should not be expected to
remove risk from the market place,51 but it should ensure that there is proper management
of that risk. Periodic evaluation of risk management processes within a regulated entity is
appropriate. SROs and third parties, such as external auditors, may be used to assist in
this process.

Instances of operational breach can occur despite the existence of internal procedures
designed to prevent the relevant misconduct or negligence. It is not practical for the
regulator to oversee adherence to those internal procedures on a day to day basis. That is
the responsibility of the senior management of the intermediary. Senior management
must ensure that they are able to discharge that responsibility. They must themselves
understand the nature of the firms business, its internal control procedures and its
policies on the assumption of risk. They must clearly understand the extent of their own
authority and responsibilities. They must have access to all relevant information about
the business on a timely basis and have available to them all necessary advice on that
business and on their own responsibilities. That information must also be available to the
regulator upon request.

The details of the appropriate internal organization of a firm will vary according to the
size of the firm, the nature of its business and the risks it undertakes but generally
regulation of market intermediaries should adhere to the following standards.

Integrity and Diligence - A firm should observe high standards of integrity and
fair dealing and should act with due care and diligence in the best interests of
its customers and the integrity of the market.

48
See IOSCO Technical Committee Paper (78), Risk Management and Control Guidance for Securities
Firms and their Supervisors, May 1998
49
See IOSCO Resolution 16. See also Report of IOSCO Technical Committee, July 9, 1990
(8) International Conduct of Business Principles.
50
See Report of IOSCO Technical Committee, July 1994 (35) Operational and Financial Risk
Management Control Mechanisms for Over-the-Counter Derivatives Activities of Regulated Securities
Firms.
51
Here, operational risk refers generally to the risk of loss through a failure of systems or deliberate or
negligent conduct of staff.

36
 Terms of Engagement - A written contract of engagement with a customer
will generally be necessary and appropriate. A firm should similarly be ready
to provide a customer with a full and fair account of the fulfillment of its
responsibilities to the customer.

Information About Customers - A firm should seek from its customers any
information about their circumstances and investment objectives relevant to
the services to be provided. Policies and procedures should be established
which ensure the integrity, security, availability, reliability and thoroughness
of all information, including documentation and electronically stored data,
relevant to the firms business operations. Where the activities of an
intermediary extend to the giving of specific advice, it is of particular
importance that the advice be given upon a proper understanding of the needs
and circumstances of the customer: a matter generally encompassed in the rule
of conduct that the intermediary must know your client.

Information for Customers - A firm should make adequate disclosure to its

customers, in a comprehensible and timely way, of information needed to
make a balanced and informed investment decision. It may be necessary for
regulation to ensure disclosure in a particular form where products carry a risk
that may not be readily apparent to the ordinary investor. Recruitment and
training should ensure that staff who provide investment advice understand the
characteristics of the products they advise upon.52

Customer Assets - Where a firm has control of or is otherwise responsible for

assets belonging to a customer which it is required to safeguard, it should
arrange proper protection for them (for example, segregation and
identification of those assets) in accordance with the responsibility it has
accepted. These measures are intended to: provide protection from
defalcation; facilitate the transfer of positions in cases of severe market
disruption; prevent the use of client funds for proprietary trading or the
financing of an intermediarys operations; and assist in orderly winding up
upon the insolvency of an individual firm should that be necessary.

Market Practice - A firm should observe high standards of market conduct,

and it should also comply with any relevant law, code or standard as it applies
to the firm. The firms compliance with all applicable legal and regulatory
requirements as well as with the firms own internal policies and procedures
should be monitored by a separate compliance function that reports directly to
senior management in a structure that makes it independent from operational
divisions.

Operational Controls - Effective policies and operational procedures and

controls in relation to the firms day-to-day business operations should be
52
Regulators should also play an active role in facilitating training and development programs.

37
 established. The effectiveness of those operational procedures and
controls should be evaluated in the light of whether they serve reasonably to
ensure:

(a) an effective exchange of information between the firm and its clients,
including required disclosures of information to clients;

(b) the integrity of the firms dealing practices, including the treatment of
all clients in a fair, honest and professional manner;

(c) the safeguarding of both the firms and its clients assets against
unauthorized use or disposition;

(d) the maintenance of proper accounting and other applicable records, and
the reliability of the information; and

(e) compliance with all relevant legal and regulatory requirements;

(f) appropriate segregation of key duties and functions, particularly those

duties and functions which, when performed by the same individual,
may result in undetected errors or may be susceptible to abuses which
expose the firm or its clients to inappropriate risks.

Conflicts of Interests - A firm should try to avoid any conflict of interest

arising but, where the potential for conflicts arise, should ensure fair treatment
of all its customers by proper disclosure, internal rules of confidentiality or
declining to act where conflict cannot be avoided. A firm should not place its
interests above those of its customers.

Proprietary Trading - There should be clear policies within the firm covering
the circumstances in which proprietary trading is permitted. The regulator
should obtain information about a regulated firms own proprietary trading
and determine that the firms net capital is adequate in relation to the risk
associated with its proprietary trading. The information provided should be
sufficient to allow for an understanding of the overall business and risk profile
of a firm and its affiliates. It should also allow for the regulation of margin
trading and the detection of conflicts of interest or manipulative practices.

12.6 Action in the Event of Financial Failure of an Intermediary53

Failure of an intermediary may have systemic consequences.

53
See Report of IOSCO Technical Committee, March 7, 1996 (49) Report on Cooperation Between
Market Authorities and Default Procedures.

38
The regulator should have a clear plan for dealing with the eventuality of failure by
market intermediaries. The circumstances of financial failure are unpredictable so the
plan needs to be flexible.

The regulator should attempt to minimize damage and loss to the investor caused by the
failure of an intermediary. A combination of actions to restrain conduct, ensure that
assets are properly managed and provide information to the market may be necessary.

Depending upon the prevailing domestic bank regulatory model, it may also be necessary
to cooperate with banking regulators, and if the domestic arrangements require it,
insolvency regulators. As a minimum position, the regulator should have identified
contact persons at other domestic and key foreign regulators.

12.7 Supervision of Intermediaries

Regulation should ensure that there is proper ongoing supervision with respect to market
intermediaries.54

Regulation should provide for:

Powers of Inspection - The right to inspect the books, records and business
operations of a market intermediary should be available to a regulator to
ensure compliance with all relevant requirements, even in the absence of a
suspected breach of conduct. There must be complementary requirements for
the maintenance of comprehensive records.

Powers of Investigation and Enforcement - The full range of investigatory

powers and enforcement remedies discussed in this document, at Section 8,
should be available to the regulator or other competent authority in cases of
suspected or actual breach.

Discipline and Revocation - There must be a fair and expeditious process

leading to discipline and, if necessary, suspension or revocation of a licence.

Discipline and licence revocation could be delegated to an acceptable SRO

but only with regulatory oversight and not on an exclusive basis.

Complaints - There should be an efficient and effective mechanism for the

resolution of investor complaints.

54
See IOSCO Resolutions 35, 37, 39 and 40.

39
12.8 Investment Advisers

Investment advisers are those principally engaged in the business of advising others
regarding the value of securities or the advisability of investing in, purchasing or selling
securities.

If an investment adviser also deals on behalf of customers, the capital and other
operational controls discussed above as applicable to other market intermediaries also
should apply to the adviser. If the adviser does not deal, but is permitted to have custody
of client assets, regulations should provide for the protection of client assets, including
segregation and periodic inspections (either by the regulator or an independent third
party).

In regulating the activities of investment advisers, the regulator may elect to place
emphasis on the substantive licensing criteria, and the capital and other requirements
recommended for regulation of other market intermediaries in Sections 12.3 - 12.6.
Alternatively, the regulator may opt for a disclosure based regime designed to permit
potential advisory clients to make an informed choice of advisers.

At a minimum however, the regulatory scheme selected should contain the following
elements:

a licensing regime that is sufficient to establish authorisation to act as an

investment adviser and to ensure access to an up to date list of authorised
advisers;
bars against the licensing of persons who have violated securities or similar
financial laws, or criminal statutes during a specified time period preceding
their application;
record keeping requirements;
clear and detailed requirements setting out the disclosures to be made by the
adviser to potential clients, including: descriptions of the advisers educational
qualifications, relevant industry experience, disciplinary history (if any),55
investment strategies, fee structure and other client charges, potential conflicts
of interest, and past investment performance (if relevant). Disclosure should
be required to be updated periodically and as material changes occur;
rules and procedures designed to prevent guarantees of future investment
performance, misuse of client assets, and potential conflicts of interest;
inspection and enforcement powers;

There are investment advisers who neither deal on behalf of clients nor hold client assets
nor have custody of client assets nor manage portfolios, but who only offer advisory
services without at the same time offering other investment services. In this case it may
be sufficient if the market intermediaries on whose services these investment advisers
55
These matters are of particular importance where there are no entry criteria based on education,
training or experience.

40
advise are adequately licensed according to the principles stated above; therefore,
separate licensing of the investment adviser may not be strictly required.

41
13. The Secondary Market

13.1 Principles for the Secondary Market

25 The establishment of trading systems including securities exchanges should be

subject to regulatory authorization and oversight.

26 There should be ongoing regulatory supervision of exchanges and trading

systems which should aim to ensure that the integrity of trading is maintained
through fair and equitable rules that strike an appropriate balance between the
demands of different market participants.

27 Regulation should promote transparency of trading.

28 Regulation should be designed to detect and deter manipulation and other

unfair trading practices.

29 Regulation should aim to ensure the proper management of large exposures,

default risk and market disruption.

30 Systems for clearing and settlement of securities transactions should be

subject to regulatory oversight, and designed to ensure that they are fair,
effective and efficient and that they reduce systemic risk.

13.2 Scope of this Section

In this document, the word markets should be understood in its widest sense, including
facilities and services relevant to equity and debt securities, options and derivative
products.

In addition to traditional organized exchanges, secondary markets should be understood

to include various forms of off-exchange market systems. These systems include
electronic bulletin boards and proprietary systems developed by intermediaries,
typically offering their services to other brokers, banks and institutional investors who
meet the operators credit standards.

The organized exchanges are the main focus of regulation. Regulation appropriate to a
particular secondary market will depend upon the nature of the market and its
participants.

Regulation will increasingly need to take account of the growing internationalization of

trading and the impact of technological developments on markets and their infrastructure.

42
13.3 Securities Exchanges and Trading Systems

The level of regulation will depend upon the proposed market characteristics, including
the structure of the market, the sophistication of market users and rights of access and the
types of products traded. In some cases it will be appropriate that a trading system should
be largely exempt from direct regulation but will require approval from the relevant
regulator after proper consideration by the regulator of the type of approval (or
exemption) necessary.

The establishment of new exchanges or trading systems, requires proper approval.

When direct regulation is appropriate, relevant matters include:56

Operator Competence - Regulation should assess the competence of the

operator of a trading facility as a secondary market. The competence of the
operator is an ongoing requirement.

Operator Oversight - The operator should be accountable to the regulator

and, when assuming principal, settlement, guarantee or performance risk,
must comply with prudential and other requirements designed to reduce the
risk of non-completion of transactions.

Admission of Products to Trading - The regulator should, as a minimum

requirement, be informed of the types of securities and products to be traded
on the trading system. The regulator should approve the rules governing the
trading of the product. The proper design of the terms and conditions
attaching to a product reduces the susceptibility of the product to market
abuses, including manipulation. Consideration of product design principles
and trading conditions is a critical aspect of ensuring a fair, orderly,
efficient, transparent and liquid market.

Admission of Participants to the Trading System - The regulator should

ensure that access to the system or exchange is fair and objective. The
regulator should oversee the related admission criteria and procedures.

Provision of Trading Information - The regulator should verify that all

similarly situated market participants have equitable access to trading
information. Any categorization of participants, for the purpose of access to
pre-trade information, should be made on a reasonable basis. Any
differential access to such information should not unfairly disadvantage
specific categories of participants.

56
See Reports of IOSCO Technical Committee, October 1994 (42) Report on Issues in the Regulation of
Cross-Border Proprietary Screen-Based Trading Systems, and June 1990 (6) Screen-Based Trading for
Derivative Products. See also Report of IOSCO Technical Committee, September 1998 (80) :
Securities Activity on the Internet.

43
 Routing of Orders - The systems order routing procedures must be clearly
disclosed to the regulator and to market participants. They must be applied
fairly and should not be inconsistent with relevant securities regulation
(e.g. client precedence or prohibition of front running or trading ahead of
customers).

Trade Execution - The order execution rules must be disclosed to the

regulator and to market participants. They must be fairly applied to all
participants.

Post Trade Reporting and Publication - Information on completed

transactions should be provided on the same basis to all participants. Full
documentation and an audit trail must be available.

Supervision of System and Participants by the Operator - The regulator

should assess the reliability of all the arrangements made by the operator for
the monitoring, surveillance and supervision of the trading system and its
participants to ensure fairness, efficiency, transparency and investor
protection, as well as compliance with securities legislation. The trading
system operator should provide the regulator with its dispute resolution and
appeal procedures, its technical systems standards and procedures related to
operational failure, information on its record keeping system, reports of
suspected breaches of law, procedures for holding client funds and
securities, and information on how trades are cleared and settled. There
must be mechanisms in place to identify and address disorderly trading
conditions and to ensure that contravening conduct, when detected, will be
dealt with.

Trading Disruptions - Details of procedures for trading halts, other trading

limitations and assistance available to the regulator in circumstances of
potential trading disruption on the system should be provided to the
regulator.

The rules and operating procedures governing these matters should be available to
market participants.

13.4 Ongoing Supervision of Systems and Information About Market Processes

The regulator must remain satisfied that the relevant conditions thought necessary as
pre-requisites to approval remain in place during operation.

Amendments to the rules of the trading system should be provided to or approved by the
regulator.

44
Approval of the trading system should be re-examined or withdrawn by the regulator
when it is determined that the system is unable to comply with the conditions of its
approval or with securities law or regulation.

13.5 Transparency of Trading57

Transparency may be defined as the degree to which information about trading (both for
pre-trade and post-trade information) is made publicly available on a real-time basis.
Pre-trade information concerns the posting of firm bids and offers, in both quote and
order-driven markets, as a means to enable investors to know, with some degree of
certainty, whether and at what prices they can deal. Post-trade information is related to
the prices and the volume of all individual transactions actually concluded.

Ensuring timely access to information is a key to the regulation of secondary trading.

Timely access to relevant information about secondary trading allows investors to better
look after their own interests and reduces the risk of manipulative or other unfair trading
practices.58

Where a market permits some derogation from the objective of real time transparency,
the conditions need to be clearly defined. The market authority (being either or both of
the exchange operator and the regulator) should, in any such event, have access to the
complete information to be able to assess the need for derogation and, if necessary, to
prescribe alternatives.

13.6 Prohibition of Manipulation and Other Unfair Trading Practices

The regulation of trading in the secondary market should prohibit market manipulation,
misleading conduct, insider trading and other fraudulent or deceptive conduct which may
distort the price discovery system, distort prices and unfairly disadvantage investors.

Such conduct may be addressed by direct surveillance, inspection, reporting, product

design requirements, position limits, settlement price rules or market halts complemented
by vigorous enforcement of the law and trading rules.

The regulator must ensure that there are in place arrangements for the continuous
monitoring of trading. These arrangements should trigger inquiry whenever unusual and
potentially improper trading occurs.

Particular care must be taken to ensure that regulation is sufficient to cover cross-market
conduct, for example, conduct in which the price of an equity product is manipulated in
order to benefit through the trading of options, warrants or other derivative products.

57
See report of IOSCO Technical Committee, December 1992 (27) Transparency on Secondary
Markets - A Synthesis of the IOSCO Debate.
58
See generally the discussion at Section 7.2.3 on the content of information.

45
When the underlying interest is traded in a jurisdiction other than the one where a
derivative instrument is traded, or where identical financial products are traded in two
jurisdictions, there may be increased potential for fraud or manipulation because of the
difficulty of a regulator in one jurisdiction to monitor market activity directly or to
conduct complete investigations of market activities in another jurisdiction. There must
be adequate information sharing between relevant regulatory authorities, sufficient to
ensure effective enforcement.

13.7 Large Exposures,59 Default Procedures and Market Disruptions

The expression large exposure refers to an open position that is sufficiently large to
pose a risk to the market or to a clearing firm. Market authorities should closely monitor
large exposures and share information with one another so as to permit appropriate
assessment of risk.

Market authorities should promote mechanisms that facilitate the sharing of the above
information through appropriate channels.

Trigger levels are qualitative or quantitative criteria that are used to identify a large
exposure. Market authorities should establish trigger levels appropriate to their markets,
and continuously monitor the size of positions on their markets. To perform this
monitoring function market authorities should have access to information on the size and
beneficial ownership of positions held by direct customers of market members. Market
authorities can then take the appropriate action, such as requiring the member to reduce
the exposure, or increasing margin requirements.

Where a market member does not make the relevant information available to the market
authority, the authority should be able to take appropriate action such as imposing
limitations on future trading by the member, requiring liquidation of positions, increasing
margin requirements, and revoking trading privileges.

Market authorities should make relevant information concerning market default

procedures available to market participants.

Regulators should ensure that the procedures relating to defaults are effective and
transparent.

Market authorities for related products (cash or derivative) should consult with each other
as soon as practicable with a view to minimizing the adverse effects of market disruption.
The information that may be needed includes contingency plans, contact persons and
structural measures to address market disruption, and information about market
conditions (such as actions taken by market authorities, prices, trading activities, and
aggregate market data). These matters are further discussed at Section 12.
59
Generally, Report of IOSCO Technical Committee, March 1996 (49) Report on Cooperation Between
Market Authorities and Default Procedures.

46
13.8 Clearing and Settlement60

Clearing and settlement systems are systems providing the process of presenting and
exchanging data or documents in order to calculate the obligations of the participants in
the system, to allow for the settlement of these obligations, and the process of
transferring funds and / or securities. The rules and operating procedures governing the
clearing and settlement systems should be available to market participants.

There should be direct supervision of clearing and settlement systems and their
operators.

13.9 Regulation and Standards for Clearing and Settlement Systems

Regulators of clearing and settlement organizations should require a framework that

permits them to ensure the accountability of such systems, to monitor and, if possible,
predict and prevent problems associated with clearing and settlement. This includes the
authority of the regulator to promote efficiency and safety through review of system
mechanisms and establishment of operating standards. Regulators should be
empowered to issue directions which the clearing and settlement organizations must
satisfy.

The operation of clearing and settlement services should be subject to inspection and
periodic review by the regulator. The clearing and settlement organizations should be
required to make reports to the regulator and may be required to submit to periodic and,
if necessary, special audits and examinations.

13.10 Verification of Trades in Clearing and Settlement Systems

The arrangements for clearing and settlement systems should provide for the
expeditious verification of a trade. The standard should be as close to real time
verification as possible. Information should be available which records the transaction,
allows it to be checked and provides the basis for settlement. Fully automated links
between the trading system and the settlement system will generally assist in such
verification. Where exchanges or trading systems do not provide such links they should
require participants to have arrangements that ensure the rapid and accurate
transmission of transaction data to the clearing service.

13.11 Risk Issues in Clearing and Settlement Systems: Margining, Netting, and
Short Selling and Securities Lending

There should be procedures to identify and monitor risks on an on-going basis.

Regulators of the securities market should be interested not only in risk reduction but
also in the assumption and shifting of risk amongst participants.
60
See IOSCO Resolutions 13 and 27. See also Report of IOSCO Emerging Markets Committee,
November 1997 (73) Towards a Legal Framework for Clearing and Settlement in Emerging Markets.

47
It is crucial that the stability, financial health and activities of participants in clearing
and settlement systems be monitored in order to minimize the risk of failure of
individual participants and overall risk to the systems. There must be information
available on the capacity of clearing members to meet calls in a timely way and clarity
of procedures in the event of default. Margin requirements (discussed below) may be
used in combination with other mechanisms to manage risk to market participants,
clearing houses and exchanges. Other risk controls may include: circuit breakers,
position limits, price limits, trading halts, capital adequacy, risk management systems,
operational standards, lending limitations, insurance coverage, back-up systems and
guarantee funds.61

A short settlement period will reduce risk to participants. T+3 is the standard
settlement time frame recommended by the Group of Thirty for equities markets. There
should be delivery versus payment systems in which transfer of ownership occurs at the
same time as payment. Delivery versus payment systems reduce the risk that a
participant will deliver full value to a counterparty and receive nothing in return. Such
systems provide that ownership should not transfer unless payment also occurs.

A centralized securities depository or registry, linked with clearing and settlement

system facilities provides a strong foundation for secure and efficient securities clearing
and settlement systems. Over time, jurisdictions should move to de-materialize
securities or to immobilize securities in regulated depositories or registries.

Derivatives settlement systems should be symmetric to avoid liquidity risk. Pays and
collects should be handled contemporaneously.

13.11.1 Margining62

Margin calls can play an important role, along with other safeguards, in protecting the
financial safety and integrity of markets. Margin requirements should be designed so that
sufficient funding is available to cover likely trading exposures. The adequacy of margin
requirements should periodically be reviewed.

Margin levels and procedures should be designed to reduce the exposure of market
participants, including the clearing house, to credit, market and other risks - in particular,
the risk of default by a market participant as a result of price movements in individual
instruments and changes in market volatility.

The costs of margin must be considered in light of the benefit of reducing risk. For
example, a consequence of high margin levels could be to reduce the leverage effect
associated with certain financial instruments and increase the cost of trading which may
affect the economic usefulness of a certain products.

61
The regulator should require sufficient stress testing of risk management and back-up systems.
62
See Reports of IOSCO Technical Committee, March 1996 (50) Report on Margin and October 1992
(22) Coordination Between Cash and Derivative Markets.

48
Consideration should be given to cross-margining and the use of a wide range of
reasonably liquid collateral.63 To cover the volatility of derivatives trading, marking to
market and intra-day settlements and margining are widely used and should be
encouraged.

13.11.2 Netting

In this context, netting refers to the reduction in the amount of processing or the levels
of exposure in a settlement system achieved by setting a participants debits and credits
off against each other leaving a smaller net obligation. Netting with novation and real
time gross settlement are efficient settlement mechanisms. The regulator and market
participants should study market volumes and participation to determine which
mechanism is appropriate for their market place..64

13.11.3 Short Selling and Securities Lending

Short selling is regarded as a useful mechanism in some jurisdictions as an aid to

liquidity65. Where short selling is permitted, regulation must guard against
manipulative practices, including those associated with a significant short position. In
some jurisdictions this involves a combination of permitting securities lending and
restricting short sales to liquid stocks. Disclosure of short sales and securities lending
positions (or, at least, their reporting to the regulator) is a tool for the further reduction
of risk.

63
See Reports of IOSCO Technical Committee, March 1996 (50) Report on Margin and October 1992
and (22) Coordination Between Cash and Derivative Markets for a discussion of: Setting Margin
Levels; Calculation; Collection and Monitoring; Default; Extraordinary Conditions; Effective
Communication; Cross Margining.
64
Novation must be effective on insolvency if it is to contribute to risk management.
65
Short selling is a necessary component of exchange traded futures and options markets.

49
 Annexure 1

LIST OF IOSCO RESOLUTIONS

(Chronological order)

1. April 1983: Resolution on the Regulation of Securities Markets (P.C.)

2. July 1986: Resolution on Factors in Capital Markets Development (P.C.)

3. July 1986: Resolution on the Privatization of State-Owned Companies (P.C.)

4. July 1986: Resolutions on the Integration of Financial Activities Within

Multi-Functional Bodies (2) (P.C.)

5. November 1986: Resolution Concerning Mutual Assistance (E.C.)

6. July 1987: Statement on the Creation of the Technical Committee of IOSCO (T.C.)

7. September 1987: Resolution on Modification and Simplification of the Prospectus

(P.C.)

8. September 1987: Resolution on Conversion of the Foreign Debt Into Securities

(P.C.)

9. September 1987: Resolution on Cooperation in Matters of Surveillance and

Enforcement (P.C.)

10. September 1987: Resolution on Development and Access of Markets (P.C.)

11. October 1988: Statement of Support for the International Accounting Standards
Committee Initiative (T.C.)

12. November 1988: Resolutions on Harmonization of Accounting and Auditing

Standards (2) (P.C.)

13. June 1989: Statement on Issues of Clearance and Settlement (T.C.)

14. June 1989: Resolution on Cooperation (E.C.)

15. September 1989: Resolution on International Harmonization of Securities and

Derivatives Markets (P.C.)

16. September 1989: Resolution on Rules of Ethics of Intermediaries (P.C.)

17. September 1989: Resolution on Market Automation and its Implications for
Regulatory Activity (P.C.)

1
 Annexure 1

18. September 1989: Resolution on Capital Adequacy Standards (P.C.)

19. September 1989: Resolution on International Equity Offers (P.C.)

20. November 1990: Resolution on Information Sharing Between SROs (SRO C. C.)

21. November 1990: Resolution on Principles for the Oversight of Screen-Based

Trading Systems for Derivative Products (P.C.)

22. November 1990: Resolution on International Conduct of Business Principles

(P.C.)

23. September 1991: Resolution on Principles for Memoranda of Understanding

(P.C.)

24. October 1992: Resolution on Principles for the Supervision of Financial

Conglomerates (P.C.)

25. October 1992: Resolution on the Endorsement of International Auditing Standards

(P.C.)

26. October 1992: Resolution on Money Laundering (P.C.)

27. October 1992: Resolution on Clearing and Settlement (P.C.)

28. October 1993: Resolution on Transnational Securities and Futures Fraud (P.C.)

29. October 1993: Resolution on Coordination Between Cash and Derivatives Markets
(P.C.)

30. October 1993: Resolution Concerning Accounting Standard IAS 7 (P.C.)

31. October 1994: Resolution on Commitment to Basic IOSCO Principles of High

Regulatory Standards and Mutual Cooperation and Assistance (P.C.)

32. July 1995: Joint IOSCO - IASC Statement on the Development of International
Accounting Standards (T.C.)

33. July 1995: Resolution Concerning Cross-Border Transactions (P.C.)

34. March 1996: Recommendation on the Recognition of Bilateral Netting Agreements

in the Calculation of Capital Requirements for Securities Firms (T.C.)

35. September 1996: Resolution on Enforcement Powers of a Securities and Futures

Supervisory Agency (E.M.C.)

2
 Annexure 1

36. September 1996: Resolution on Providing Certainty of the Enforceability of

Netting Arrangements for Over-the-Counter Derivatives Transactions (P.C.)
37. February 1997: Resolution on Enforcement Powers (T.C.)

38. May 1997: Statement on Year 2000 (T.C.)

39. November 1997: Resolution on Enforcement Powers (P.C.)

40. November 1997: Resolution on Principles for Record Keeping, Collection of

Information, Enforcement Powers and Mutual Cooperation to Improve the
Enforcement of Securities and Futures Laws (P.C.)

3
 Annexure 2

IOSCO DOCUMENTATION

1989

1. International Equity Offers - Summary of Report, Report of the Technical Committee,

September 1989

2. Capital Adequacy Standards for Securities Firms, Report of the Technical Committee,
September 1989

1990

3. Compliance Information Collection and Data Reporting Compendium and Chart, Report of
the Technical Committee, June 1990

4. Principles for the Oversight of Screen-Based Trading Systems, Report of the Technical
Committee, June 1990

5. Regulation of Derivative Markets, Products and Financial Intermediaries - Collated

Summary of Responses to Common Framework Analysis and Cross Regulatory Summary
Chart, Report of the Technical Committee, June 1990

6. Screen-Based Trading Systems for Derivative Products, Report of the Technical Committee,
June 1990

7. Clearing and Settlement, Report of the Technical Committee, July 2nd, 1990

8. International Conduct of Business Principles, Report of the Technical Committee,

July 9, 1990

9. The Role of Securities Commissions, Report of the Development Committee (now called the
Emerging Markets Committee), September 1990

10. International Equity Offers - Changes in Regulation Since June 1989, Report of the
Technical Committee, October 1990

11. Market Automation and its Implications for Regulatory Activities, Report of the
Development Committee (now called the Emerging Markets Committee), October 9, 1990

12. International Accounting and Auditing Standards, Report of the Technical Committee,
November 1990

13. Stimulation of the Development of Emerging Securities Markets, Report of the Development
Committee (now called the Emerging Markets Committee), November 1990

14. Capital Requirements for Multinational Securities Firms, Report of the Technical
Committee, November 13, 1990

1
 Annexure 2

1991

15. Comparative Analysis of Disclosure Regimes, Report of the Technical Committee,

September 1991

16. International Equity Offers - Changes in Regulation Since April 1990, Report of the
Technical Committee, September 1991

17. Principles of Memoranda of Understanding, Report of the Technical Committee,

September 1991

18. Report on the Resolution on Principles for the Oversight of Screen-Based Trading Systems
for Derivative Products, Report of the Secretary General, September 1991

1992

19. Report on Stimulation Policies for Securities Market Development, Report of the
Development Committee (now called the Emerging Markets Committee), 1992

20. International Equity Offers - Changes in Regulation Since April 1991, Report of the
Technical Committee, September 1992

21. Clearing and Settlement in Emerging Markets - A Blueprint, Report of the Development
Committee (now called the Emerging Markets Committee), October 1992

22. Coordination Between Cash and Derivative Markets - Contract Design of Derivative
Products on Stock Indices and Measures to Minimize Market Disruption, Report of the
Technical Committee, October 1992

23. Principles for the Supervision of Financial Conglomerates, Report of the Technical
Committee, October 1992

24. Report on Disclosure Requirements, Report of the Development Committee (now called the
Emerging Markets Committee), October 1992

25. Report on Incentives for Market Development, Report of the Development Committee (now
called the Emerging Markets Committee), October 1992

26. Report on Money Laundering, Report of the Technical Committee, October 1992

27. Transparency on Secondary Markets: A Synthesis of the IOSCO Debate, Report of the
Technical Committee, December 1992

1993

2
 Annexure 2

28. Clearance and Settlement in the Markets of the Members of the Technical
Committee - Implementation of the Group of Thirty Recommendations, Report of the General
Secretariat, May 1993
29. Mechanisms to Enhance Open and Timely Communication Between Market Authorities of
Related Cash and Derivative Markets During Periods of Market Disruption, Report of the
Technical Committee, October 1993

30. Protecting the Small Investor: Combating Transnational Retail Securities and Futures
Fraud, Report of the Technical Committee, October 1993

31. Regulation of Derivative Markets, Products and Financial Intermediaries - Collated

Summary of Responses to Common Framework of Analysis and Cross Regulatory Summary
Chart, Report of the Technical Committee, October 1993

32. Report on Disclosure, Report of the Development Committee (now called the Emerging
Markets Committee), October 25, 1993

33. Report on Internationalization, Report of the Development Committee (now called the
Emerging Markets Committee), October 25, 1993

34. Report on Privatization, Report of the Development Committee (now called the Emerging
Markets Committee), October 25, 1993

1994

35. Operational and Financial Risk Management Control Mechanisms for Over-the-Counter
Derivatives Activities of Regulated Securities Firms, Report of the Technical Committee,
July 1994

36. Clearance and Settlement in the Markets of the Members of the Technical
Committee - Implementation of the Group of Thirty Recommendations, Report of the General
Secretariat, September 1994

37. Report on Derivatives, Report of the Development Committee (now called the Emerging
Markets Committee) Task Force, September 1994

38. International Equity Offers - Changes in Regulation Since April 1992, Report of the
Technical Committee, October 1994

39. Report on Disclosure and Accounting, Report of the Technical Committee, October 1994

40. Report on Investment Management - Principles for the Regulation of Collective Investment
Schemes and Explanatory Memorandum, Report of the Technical Committee, October 1994

41. Report on Issues Raised for Securities and Futures Regulators by Under-Regulated and
Uncooperative Jurisdictions, Report of the Technical Committee, October 1994

42. Report on Issues in the Regulation of Cross-Border Proprietary Screen-Based Trading

Systems, Report of the Technical Committee, October 17, 1994

3
 Annexure 2

1995

43. Framework for Supervisory Information About the Derivatives Activities of Banks and
Securities Firms, Joint Report of the Technical Committee and of the Basle Committee on
Banking Supervision, May 1995

44. Clearance and Settlement in the Markets of the Members of the Technical
Committee - Implementation of the Group of Thirty Recommendations, Report of the General
Secretariat, July 1995

45. Report on Investment Management, Report of the Technical Committee, July 1995

46. The Implications for Securities Regulators of the Increased Use of Value at Risk Models by
Securities Firms, Report of the Technical Committee, July 1995

47. The Supervision of Financial Conglomerates, Report of the Tripartite Group of Bank,
Securities and Insurance Regulators with a Preface by IOSCO, the Basle Committee and the
IAIS, July 1995

48. Public Disclosure of the Trading and Derivatives Activities of Banks and Securities Firms,
Joint Report by the Technical Committee and by the Basle Committee on Baking
Supervision, November 1995

1996

49. Report on Cooperation Between Market Authorities and Default Procedures, Report of the
Technical Committee, March 7, 1996

50. Report on Margin, Report of the Technical Committee, March 7, 1996

51. Response of the Basle Committee on Banking Supervision and of the International
Organization of Securities Commissions to the Request of the G-7 Heads of Government at
the June 1995 Halifax Summit, May 1996

52. Discussion Paper on International Cooperation in Relation to Cross-Border Activity of

Collective Investment Schemes, Report of the Technical Committee, June 1996

53. Legal and Regulatory Framework for Exchange Traded Derivatives, Report of the Emerging
Markets Committee, June 1996

54. Regulatory Cooperation in Emergencies - A Discussion Paper, Report of the Technical

Committee, June 1996

55. Measures Available on a Cross-Border Basis to Protect Interests and Assets of Defrauded
Investors, Report of the Technical Committee, July 1996

4
 Annexure 2

56. Report on the Implementation of IOSCO Resolutions, Report of the General Secretariat,
July 29, 1996

57. Client Asset Protection, Report of the Technical Committee, August 1996

58. Collective Investment Schemes in Emerging Markets, Report of the Emerging Markets
Committee, September 1996

59. Disclosure of Risk - A Discussion Paper, Report of the Technical Committee,

September 1996

60. Guidance on Custody Arrangements for Collective Investment Schemes - A Discussion

Paper, Report of the Technical Committee, September 1996

61. International Equity Offers - Changes in Regulation Since April 1994, Report of the
Technical Committee, September 1996

62. Reporting of Material Events in Emerging Markets, Report of the Emerging Markets
Committee, September 1996

63. Report on the Improvement of Cooperation and Coordination in the Surveillance of

Securities and Futures Transactions, Report of the General Secretariat, September 1996

64. Survey of Disclosures About Trading and Derivatives Activities of Banks and Securities
Firms, Joint Report by the Basle Committee on Banking Supervision and by the Technical
Committee, November 1996

1997

65. Disclosure Framework for Securities Settlement Systems, Joint Report by the Committee on
Payment and Settlement Systems and by the Technical Committee, February 1997

66. Comparative Paper on Capital Adequacy Standards, Report of the Emerging Markets
Committee, May 1997

67. Short Selling and Securities Lending: Issues for Consideration, Discussion Paper by the
Emerging Markets Committee, May 1997

68. Principles for the Supervision of Operators of Collective Investment Schemes, Report of the
Technical Committee, September 1997

69. Report on Enforcement Issues Raised by the Increasing Use of Electronic Networks in the
Securities and Futures Field, Report of the Technical Committee, September 1997

70. International Equity Offers - Changes in Regulation Since April 1996, Report of the
Technical Committee, September 1997

5
 Annexure 2

71. Directory of Information - Authorisation of Collective Investment Schemes (CIS) and Related
Services, Report of the Technical Committee, October 1997

72. Financial Risk Management in Emerging Markets - Final Report, Report of the Emerging
Markets Committee, November 1997
73. Towards a Legal Framework for Clearing and Settlement in Emerging Markets, Report of
the Emerging Markets Committee, November 1997

74. Comparative Report on the Requirement of Adjustment for Inflation of the Emerging
Markets Financial Statements, Report of the Emerging Markets Committee, November 1997

75. Report on the Self-Evaluation Conducted by IOSCO Members Pursuant to the

1994 IOSCO Resolution on Commitment to Basic IOSCO Principles of High Regulatory
Standards and Mutual Cooperation and Assistance, Report of IOSCO, November 1997

76. Guidance on Information Sharing. Report of the Technical Committee, November 1997

1998

77. Methodologies for Determining Minimum Capital Standards for Internationally Active
Securities Firms Which Permit the Use of Models Under Prescribed Conditions, Report of
the Technical Committee, May 1998

78. Risk Management and Control Guidance for Securities Firms and their Supervisors, Report
of the Technical Committee, May 1998

79. International Disclosure Standards for Cross-Border Offerings and Initial Listings by
Foreign Issuers. IOSCO Document, September 1998

80. Securities Activity on the Internet. Report of the Technical Committee, September 1998

81. Framework for Disclosure of Trading and Derivatives Activities of Banks and Securities
Firms, Joint Report by the Basle Committee on Banking Supervision and by the Technical
Committee of IOSCO, September 1998.

Consultation Documents

(1) Supervision of Financial Conglomerates, February 1998 (Joint Forum on Financial

Conglomerates)

6
 Annexure 3

The Legal Framework

Effective securities regulation depends upon an appropriate legal framework. The matters
to be addressed in the domestic laws of a jurisdiction include:

(1) Company Law

1.1 company formation
1.2 duties of directors and officers
1.3 regulation of takeover bids and other transactions intended to effect a change
in control
1.4 laws governing the issue and offer for sale of securities
1.5 disclosure of information to security holders to enable informed voting
decisions
1.6 disclosure of material shareholdings

(2) Commercial Code / Contract Law

2.1 private right of contract
2.2 facilitation of securities lending and hypothecation
2.3 property rights, including rights attaching to securities, and the rules
governing the transfer of those rights

(3) Taxation Laws

3.1 clarity and consistency, including, but not limited to, the treatment of
investments and investment products

(4) Bankruptcy and Insolvency Laws

4.1 rights of security holders on winding up
4.2 rights of clients on insolvency of intermediary
4.3 netting

(5) Competition Law

5.1 prevention of anti-competitive practices
5.2 prevention of unfair barriers to entry
5.3 prevention of abuse of a market dominant position

(6) Banking Law

(7) Dispute resolution system

7.1 a fair and efficient judicial system (including the alternative of arbitration or
other alternative dispute resolution mechanisms)
7.2 enforceability of court orders and arbitration awards, including foreign
orders and awards